Murphy USA Stock: Potential Share Appreciation Via Share Buybacks (NYSE:MUSA)

Business & Competitive Advantage

Murphy USA Inc. (NYSE:MUSA) was founded in Delaware in March 2013, and holds via its subsidiaries the convenience store business of its former parent company Murphy Oil Corporation. Murphy USA primarily sells motor fuels and convenience store merchandise in its network of ~1,800 stores across 27 states, where the vast majority of them are branded “Murphy”, with the remainder branded “QuickChek”. It also markets fuel to unbranded wholesale customers through a network of refined petroleum product distribution terminals and pipelines.

Murphy USA expands via merger & acquisition deals, as well as building greenfield projects. On January 29, 2021 Murphy USA acquired QuickChek Corporation, which was at the time a privately owned convenience store chain. Many of Murphy USA’s locations are near Walmart stores. Murphy self-describes as running low price, high volume refueling locations that sell a range of food and beverage offerings – part of what attracts customers to Murphy stations is the relatively lower price of motor fuels. It has a motto:

Deliver every day the quickest, most friendly customer service and a low-price value proposition to our growing customer base for the products and markets we serve.

Murphy in its 2023 10-K filing describes 5 mutually reinforcing strengths that provide it a competitive advantage vs. its peers:

“Strategic proximity to and complementary relationship with Walmart”: The majority of Murphy USA locations are located near a Walmart, which generates traffic to its convenience stores, while low-priced gasoline and convenience products appeal to both of their customers. Murphy USA collaborates with Walmart on Walmart+ fuel discount programs that is a mutually beneficial arrangement.

“Winning proposition with value-conscious consumers”: Murphy deliberately sells its fuel at lower prices than its competitors to appeal to cost-conscious consumers. The low priced gasoline is designed to drive larger volume sales as well as gross profits. Also, Murphy is an industry leader in per store tobacco sales because of its competitively priced cigarettes. Murphy also runs a Murphy Drive Rewards program and QuickChek Rewards loyalty programs.

“Low cost retail operating model”: Murphy operates smaller stores in general, with many of them being raze-and-rebuild 1,400 & 2,800 square foot stores that require less capex, maintenance, and utility than compared to its competitors. Many stores only require 1 or 2 associates at any given time, and 75% of stores are on fully owned property that does not incur any rent expenses.

“Distinctive fuel supply chain capabilities”: Murphy sources fuel near industry benchmark prices because of the number of fuel options available in the bulk and rack product markets, their shipper status on pipeline systems, and access to many transport terminal locations. Murphy additionally leverages economies of scale in its purchases to drive down costs further.

“Resilient financial profile and engaged team”: Murphy’s “fee-simple” asset base, ability to sustain attractive gross margins via its low price high volume strategy, and low overhead costs allow it to survive periods of unfavorable commodity price movements and thin fuel margins. It also keeps a large cash position as well as a revolving credit facility to provide ample liquidity at all times to support its capex program.

Additionally, Murphy USA’s 2023 10-K filing articulated a clear set of 5 maxims to follow that represents its business strategy: growing organically via raze and rebuild, diversifying its merchandise mix, sustaining its cost leadership position, creating advantages from fuel price volatility, and investing for the long term. This is in response to identifying several key trends in the retail fuel and convenience store industry: sensitivity to gas prices (for some consumers, a single penny difference in price can motivate a choice of gas station), advantages of economies of scale in a highly fragmented industry, high fuel sales volumes at raze-and-rebuild store locations, and taking advantage of high levels of consumer traffic at supermarkets and large hypermarkets.

Author’s note: I find it refreshing to read a 10-K whose entirety of its first few pages is dedicated to a business strategy and growth philosophy. It means that management consciously knows and acts on the principles they really want me and you to know about.

Performance & Return Of Capital

Murphy USA stock has been soaring; it seems like their business strategy and growth philosophy is really working:

When this graph started in late 2013, the share price was about $37, which if you invested in Murphy USA back then, would now be worth $517.53. This represents an annualized total return rate of 27.1% CAGR. Clearly, to achieve a return like that, Murphy had a high return on equity too:

We have to be careful when interpreting return on equity graphs: companies can take out debt to conduct share buybacks, which artificially depresses the company’s book value and artificially raises the return on equity beyond what the underlying business engine actually does. Observe that it’s true that Murphy USA has been issuing long term debt in conjunction with using operating cash flow to periodically to buy back shares:

As a result, the outstanding share count for Murphy USA has dropped precipitously over the last 10 years: since 2014, it has reduced its share count by over 50%, for a compound annual rate of about 7.78% CAGR (!).

This means that the returns profile of Murphy USA is strongly tilted towards share buybacks and away from dividends: note that total dividends paid is represented below as a negative number. As a consequence, MUSA’s dividend yield is very low – in fact it’s under 1%. I would expect that income investors may be disappointed but total return investors may be thrilled:

So far so good, we’ve looked at outside measures of financial performance: however, what does the company look like on the inside, financially? Next we will compare Murphy USA’s income statement, cash flow statement, and balance sheet information for 2013 and 2023 taken from the corresponding 10-K filings to see exactly what difference 10 years makes.

Income Statement Comparison

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I have several takeaways from this comparison:

• Growth in operating income between 2013 and 2023 was largely driven by increases in sales of petroleum products and merchandise, with merchandise having the largest gross margins.
• Store & Other operating expenses and SG&A doubled during this period.
• Operating income increased by 211.8%, largely driven by increased merchandise sales and merchandise margins.
• Overall tax rate fell from 39.3% in 2013 to 24.2% in 2023.
• Earnings per share grew 407.8%, driven by both increases in operating margins and massive decreases in the share count.

Overall, Murphy USA has expanded its operating income by focusing on higher margin merchandise sales, rather than by expanding its number of locations. Actually, its rate of opening new stores is rather low.

Cash Flow Statement Comparison

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I have a few takeaways from comparing these two cash flow statements:

• Operating cash flow increase during this period is largely driven by increased operating income, which was driven by higher sales of motor fuels and high-margin merchandise.
• Murphy USA has increased its spending on property additions drastically.
• In 2013 Murphy USA took on a large chunk of long term debt to fund a distribution to its parent, Murphy Oil, as part of the spinoff. By 2023, those transactions had long ended, and Murphy USA has been aggressively investing in share repurchases.

Overall this paints a picture of a business that has finished its obligations to its parent, and which is expanding by primarily focusing on merchandise sales, and only secondarily focusing on expansion by adding store locations.

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Again, I have a few takeaways from this comparison:

• Murphy USA’s constant capital expenditure in property additions caused the net property, plant & equipment account to more than double during this period. This is a combination of M&A and organic growth.
• The long-term debt account grew by over 200% during this period.
• The retained earnings account grew drastically, over 3,000%. This is good, because Murphy is retaining its own earnings for growth & expansion.

A comment about the long-term debt: while on the whole I consider the long term debt increase to be a net negative as I don’t like the practice of issuing debt to do share buybacks as it mortgages future operating cash flows, the debt itself carries at least relatively average coupon rates:

Current Market Valuation Of Common Shares

At this point, maybe you’re interested in going long on Murphy USA. Let’s next take a look at some relative valuation metrics. First, I’ll begin with the historical P/E ratio:

Historically speaking, Murphy USA has traded in a band centered around 15x earnings. Currently, it trades at 20.40x, which means that by this metric MUSA is currently on the expensive side. Next, let’s look at operating cash flow yield on market cap:

By this metric, the higher the ratio, the lower the market’s relative valuation. Currently, MUSA trades at 8.8% operating cash flow yield, which is on the high end of its historical valuations by this metric. Next, let’s look at P/B ratio:

Admittedly, the P/B ratio is not so helpful, because Murphy USA has been leveraging up its balance sheet with cheap debt to do share buybacks, artificially decreasing its book value, and thereby artificially increasing its returns on equity. P/B ratio alone suggests that Murphy USA is getting overvalued, but it needs to be placed in context with return on equity, which tempers the conclusion a lot.

By both P/E and operating cash flow yield metrics, I think Murphy USA is currently trading on the expensive side of its historical valuations. If you’re a market timer then maybe you’d want to wait for a better entry point. If you believe in the mantra that “time in the market beats timing the market”, given that this stock has a long history of share buybacks and capital appreciation, you might not be turned off by its somewhat richer valuation today.

Risks In Investing In Murphy USA

Most of the risks mentioned in the 10-K filing are rather obvious and spurious, designed to shield management from lawsuits by shareholders. Instead, I’m going to list what, I think, are the main non-trivial or unique risks associated with investing in Murphy:

Murphy USA primarily sells motor fuels, which have thin margins that could be disrupted by excess volatility in the markets. Additionally, disruptions to pipeline, transport terminal and other third-party transportation of motor fuels could disrupt Murphy’s competitive advantage in working the respective markets for purchases.

Murphy relies on one primary supplier for over 77% of its merchandise, Core-Mark. If Core-Mark’s operations are disrupted or if it cannot fulfill its contractual obligations, then Murphy’s own operations could be affected.

Walmart is a key relationship with respect to the Murphy USA network of stores. Most Murphy locations are located near a Walmart to symbiotically feed off each other’s attracted customer traffic. Any deterioration in Murphy’s relationship with Walmart could have an adverse effect on Murphy branded stores that participate in a gasoline discount. Additionally, if Walmart’s customer traffic weakens, it could have another negative effect on Murphy USA’s financial results.

Potential legislation, court rulings, and/or regulation of tobacco products, as well as campaigns to discourage smoking could have a negative effect on Murphy USA, which sells tobacco products as a major fraction of its convenience store merchandise.

Increased fuel efficiency or trends towards switching to hydrogen or electric-powered automobiles could have a negative impact on Murphy’s motor fuel sales. Admittedly this risk is likely to take decades to play out, during which time Murphy would have plenty of time to adapt to the new market trends.